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Unit 1: The nature and theories of entrepreneurship

1.1 What is entrepreneurship?


Entrepreneurship is the practice of starting new organizations or revitalizing mature
organizations, particularly new businesses generally in response to identified opportunities.
Entrepreneurship is often a difficult undertaking, as a vast majority of new businesses fail.
Entrepreneurial activities are substantially different depending on the type of organization
that is being started. Entrepreneurship ranges in scale from solo projects (even involving the
entrepreneur only part-time) to major undertakings creating many job opportunities.
According to Schumpeter(1934) the essence of entrepreneurship lies in the perception and
exploitation of new opportunities. It always has to do with bringing about a different use of
national resources in that the withdrawal from their traditional employ and subject them to
new combinations.
According to Hisrich and Peters, (1995), entrepreneurship is the process of creating something
different with value by devoting the necessary time and efforts, assuming the accompanying
financial,. Psychic, and social risks, and receiving rewards of monetary and personal satisfaction and
independence.

1.2 Nature and characteristics of entrepreneurship

Taking key concepts from a number of definitions, including the ones above, one can identify
some important aspects of entrepreneurship and the entrepreneur
• Identifying an opportunity: This means that there must be a real business opportunity.
• Innovation and creativity: Something new and different is required.
• Getting resources: Capital labour and operating equipment must be found.
• Creating and growing a venture: This refers to the starting of a new business venture
or the conversion of an existing business.
• Taking risk: This means that there will be personal and financial risk involved for the
person who embarks on the entrepreneurial process.
• Being rewarded: Reward is an essential element of the free market system. It can be
in the form of profit or an increase in the value of the business.
• Managing the business: This means that there must be planning, organisation,
leadership and control of all the functions in the business venture.

1.3 History of Entrepreneurship

The understanding of entrepreneurship owes much to the work of economist, behavioural


scientists, management scientists and in later years to entrepreneurs themselves as indicated
in the table below.

Period Topics Authors and researchers


What entrepreneurs do (1700 – From an economic perspective Cantillon, Say, Schumpeter
1950)
What entrepreneurs are (1960 – From a behavioural perspective Weber, Mclelland
1980)
What entrepreneurs do (1700 – From management science perspective Drucker, Mintzberg
1950) (finance, marketing operations, human

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resources)
What support is needed by From a social perspective including Gatner, Welsh
entrepreneurs (1985 -) economists and sociologists
What entrepreneurial activities are From an entrepreneurial perspective Timmons, Vasper
and competencies are required to
perform them do (1990-)

Adopted from Gideon et al (2003)

In Schumpeter (1950), an entrepreneur is a person who is willing and able to convert a new
idea or invention into a successful innovation. Despite Schumpeter's early 20th-century
contributions, the traditional microeconomic theory of economics has had little room for
entrepreneurs in its theoretical frameworks (instead assuming that resources would find each
other through a price system). If we perceive two kinds of entrepreneurs namely business
organizers and innovators, then economists perceived entrepreneurship in terms of business
organization and not innovation.

For Frank H. Knight (1967) and Peter Drucker (1970) entrepreneurship is about taking risk.
The behavior of the entrepreneur reflects a kind of person willing to put his or her career and
financial security on the line and take risks in the name of an idea, spending much time as
well as capital on an uncertain venture.

Knight classified three types of uncertainty.

• Risk, which is measurable statistically (such as the probability of drawing a red colour
ball from a jar containing 5 red balls and 5 white balls).
• Ambiguity, which is hard to measure statistically (such as the probability of drawing a
red ball from a jar containing 5 red balls but with an unknown number of white balls).
• True Uncertainty or Knightian Uncertainty, which is impossible to estimate or predict
statistically (such as the probability of drawing a red ball from a jar whose number of red
balls is unknown as well as the number of other coloured balls).

The acts of entrepreneurship are often associated with true uncertainty, particularly when it
involves bringing something really novel to the world, whose market never exists. Before
Internet, nobody knew the market for Internet related businesses such as Amazon, Google,
YouTube, Yahoo etc. Only after the Internet emerged did people begin to see opportunities
and market in that technology. However, even if a market already exists, let's say the market
for cola drinks (which has been created by Coca Cola), there is no guarantee that a market
exists for a particular new player in the cola category. The question is: whether a market
exists and if it exists for you.

1.3 The Entrepreneur

Some myths abut Entrepreneurs

Myth No.1 -Entrepreneurs are born, not made

Reality: The making of an entrepreneur occurs by accumulating the relevant skills, know-how,
experiences, and contracts over a period of years and includes large doses of self-development.

Myth No. 2 – Anyone can start a business

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Reality: The easiest part is starting up. What is hardest is surviving sustaining, and building a
venture so its founders can realize a harvest.

Myth No. 3 – Entrepreneurs want the whole show to themselves

Reality: solo entrepreneurs make a living, but it is extremely difficult to grow higher-potential venture
by working single-handedly. Higher-potential entrepreneurs build a team, and organization, and a
company.

Myth No. 4 – Entrepreneurs are their own bosses and completely independent.

Reality: Entrepreneurs have to serve many masters and constituencies, including partners, investors,
customers, suppliers, creditors, employees, and families. Entrepreneurs can, however, make free
choices of whether, when, and to what they respond.

Myth No. 5 – Entrepreneurs experience a great deal of stress and pay a high price.

Reality: No doubt about it; being an entrepreneurs is stressful and demanding.

But there is no evidence that it is any more stressful than numerous other highly demanding
professional roles, and entrepreneurs find their jobs very satisfying.

Myth No. 6 – Entrepreneurs should be young and energetic.

Reality: These qualities may help, but age is no barrier. The average age of entrepreneurs starting
high potential businesses is in the mid-30s, and many start businesses in their 60s.

Myth No. 7 – If an entrepreneur has enough start – up capital, he or she can’t miss.

Reality: The opposite is often true. Too much money often creates euphoria, lack of discipline and
impulsive spending, leading to serious problems.

Myth No. 8 If an entrepreneur is talented, success will happen in a year or two.

Reality: An old maximum among venture capitalist says that the lemon ripens in two and a half years,
but the pearls take seven or eight. Rarely is the new business established solidly in less than three or
fur years.

Entrepreneurs have many of the same character traits as leaders. Entrepreneurs are often
contrasted with managers and administrators who are said to be more methodical and less
prone to risk-taking. Such person-centric models of entrepreneurship have shown to be of
questionable validity, not least as many real-life entrepreneurs operate in teams rather than as
single individuals. Still, a vast but now clearly dated literature studying the entrepreneurial
personality found that certain traits seem to be associated with entrepreneurs:

1. David McClelland (1961) described the entrepreneur as primarily motivated by an


overwhelming need for achievement and strong urge to build.
2. Collins and Moore (1970) studied 150 entrepreneurs and concluded that they are tough,
pragmatic people driven by needs of independence and achievement. They seldom are
willing to submit to authority.
3. Bird (1992) sees entrepreneurs as mercurial, that is, prone to insights, brainstorms,
deceptions, ingeniousness and resourcefulness. they are cunning, opportunistic, creative,
and unsentimental.
4. Cooper, Woo, & Dunkelberg (1988) argue that entrepreneurs exhibit extreme optimism
in their decision-making processes. In a study of 2004 entrepreneurs they report that
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81% indicate their personal odds of success as greater than 70% and a remarkable 33%
seeing odds of success of 10 out of 10.
5. Busenitz and Barney (1997) claim entrepreneurs are prone to overconfidence and over
generalisations.
6. Cole (1959) found there are four types of entrepreneur: the innovator, the calculating
inventor, the over-optimistic promoter, and the organization builder. These types are not
related to the personality but to the type of opportunity the entrepreneur faces.

Characteristics of an entrepreneur

• The entrepreneur has an enthusiastic vision, the driving force of an enterprise.


• The entrepreneur's vision is usually supported by an interlocked collection of specific
ideas not available to the marketplace.
• The overall blueprint to realize the vision is clear however details may be incomplete,
flexible, and evolving.
• The entrepreneur promotes the vision with enthusiastic passion.
• With persistence and determination, the entrepreneur develops strategies to change the
vision into reality.
• The entrepreneur takes the initial responsibility to cause a vision to become a success.
• Entrepreneurs take prudent risks. They assess costs, market/customer needs and
persuade others to join and help.
• An entrepreneur is usually a positive thinker and a decision maker.
1.4 Alternative categorization of entrepreneurs
Entrepreneurs can be found at different levels of entrepreneurial sophistication based on the
nature of their entrepreneurial activities. These levels are discussed below.
Basic survivalists
No economic independence, little involvement with other entrepreneurs within their social
network (individualism).
Entrepreneurial activities: Isolated from markets, unaware of their own potential, illiterate,
few income-generating activities. A practical example could be a person standing on a street
corner holding a sign stating that. he will wash cars in exchange for Tshs 1000.
Pre entrepreneurs
Follow the group initiative (collectivism
Entrepreneurial activities:
Welfare-oriented approach, not expected to be self-sustaining. Training needed in
entrepreneurship competency. A practical example could be a person selling crafts next to the
road with ten other pre entrepreneurs selling exactly the same product at exactly the same
price.
Subsistence entrepreneurs
Self-employed, independent income generation, temporary market stall or stand.
Entrepreneurial activities:

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Inexperienced in business management and still needs general support and training in
technical and management skills. Street vendors are an example of this level.
Micro-entrepreneurs
Zero to nine employees, operating license from local authority, fixed workshop.
Entrepreneurial activities:, .
Difficult in getting loans from banks. Assistance projects focus on credit rather than training
and technical assistance. A practical example is an entrepreneur who runs a home-based
business such as a hair dressing salon.
Small-scale entrepreneurs
Ten to 49 employees.
Entrepreneurial activities:
Qualifies for a loan from a bank. Well educated and has adequate collateral to apply for a
loan. An example could be an entrepreneur who operates a small accounting or law firm.

1.5 Entrepreneurship and small business

Small businesses
It is important to distinguish between entrepreneurial ventures and small businesses. Both are
critical to the performance of the economy but serve different economic functions. Both
pursue and create new opportunities differently, they fulfil the ambitions of their founders
and managers in different ways, and they present different challenges to economic policy
makers. Both need entrepreneurial action for start-up, but the small business venture will tend
to stabilise at a certain stage and only grow with inflation. Small business owners are
individuals who establish and manage their businesses for the principal purpose of furthering
personal goals and ensuring security. The activities of artisan/craftsman,
administration/manager and security/family are indicated as characteristics of small business
ownership.

Therefore, a small business is any business that is independently owned and operated, but is
not dominant in its field and does not engage in any new marketing or innovative practices.
Owners of small businesses are not necessarily interested in growth as an objective.
Themselves are considered successful when are profitable. Autonomy and security are
primary objectives of some owners businesses. They consider themselves successful even if
they earn a smaller income than they would have as employees. Quite often business only
supports a certain lifestyle of the owner.

Entrepreneurial ventures
Entrepreneurial ventures are businesses where the principal objectives are profitability and
growth. Three characteristics distinguish entrepreneurial venture from the small business.
• Innovation: Entrepreneurial ventures thrive on innovation, be it a technological,
service delivery or product Small business is usually only involved in delivering an
established product or service.
• Potential for growth: Due to its innovation approach, an entrepreneurial venture has a
great deal more potential for growth than small business. It is in a position to create its
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own market. The small business operates in an established industry and is unique only in
terms of its locality.
• Strategic objectives: The Entrepreneurial venture will usually set itself strategic
objectives in relation to: Market targets, Market development, Market share and Market
position

The small business rarely cares about these aspects. Its objectives seldom go beyond survival,
sales and profit targets. Entrepreneurial ventures are the ones that create employment.
Although small business and entrepreneurial ventures both need Entrepreneurial action
during start ups, the small business will tend to stabilise at a certain stage and only grow with
inflation.

1.6 Entrepreneurship, management and leadership


All entrepreneurs are not good leaders or managers, but leadership and management skills are
critical success factors. All managers and leaders are not necessarily entrepreneurs or
entrepreneurially oriented, as one can witness from the fact that many firms go into decline or
failure and that many political and social leaders have no entrepreneurial inclination at all.
The entrepreneurial process ends in the last phase of the entrepreneurial process where the
business is started and the entrepreneur has to start managing it. There are important
differences between the entrepreneurial and managerial functions, as well as the expertise and
competence with regard to each.
Entrepreneurial functions include innovative thinking and the identification of opportunities,
planning and establishment and/or growth of the business, and application of resources.
After establishing the business, the entrepreneur has to start managing it. Management of the
business involves the managerial functions of planning, organising, leading and control. The
entrepreneur also has to manage the various business functions, such as finance, marketing,
production, purchasing, administration, human resources and public relations.
There are major differences between these important roles to be played by the entrepreneur,
and not all entrepreneurs are equipped to perform all the roles of establishing and managing
the business. They often have the natural ability to identify opportunities and establish the
business, but need some training, employees or the assistance of specialists to manage the
business successfully.
Again not all entrepreneurs are good leaders though it is essential that they posses leadership
qualities.

1.7 Advantages of Entrepreneurship

Every successful entrepreneur brings about benefits not only for himself/ herself but for the
municipality, region or country as a whole. The benefits that can be derived from
entrepreneurial activities are as follows:

• Enormous personal financial gain


• Self-employment, offering more job satisfaction and flexibility of the work force
• Employment for others, often in better jobs

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• Development of more industries, especially in rural areas or regions disadvantaged by


economic changes, for example due to globalization effects
• Encouragement of the processing of local materials into finished goods for domestic
consumption as well as for export
• Income generation and increased economic growth
• Healthy competition thus encourages higher quality products
• More goods and services available
• Development of new markets
• Promotion of the use of modern technology in small-scale manufacturing to enhance
higher productivity
• Encouragement of more researches/ studies and development of modern machines and
equipment for domestic consumption
• Development of entrepreneurial qualities and attitudes among potential entrepreneurs
to bring about significant changes in the rural areas
• Freedom from the dependency on the jobs offered by others
• The ability to have great accomplishments
• Reduction of the informal economy
• Emigration of talent may be stopped by a better domestic entrepreneurship climate

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